Counterfeit cigarettes on the rise within EU borders

The production of counterfeit cigarettes is on the rise in Europe, according to a new in-depth study released today by KPMG. The second instalment of the KPMG Stella report, elaborating on initial findings published this summer, investigates the state of illicit trade in Europe and the key factors contributing to the black market of illicit tobacco.

The report highlights a worrying trend in the growing number of counterfeit and illicit white cigarettes being manufactured within the EU’s borders. In 15 EU countries, consumption of counterfeit cigarettes increased last year.

Traditionally, illicit cigarettes would come into the EU from countries on the Eastern EU border. However, criminal gangs are increasingly setting up illicit tobacco factories inside the EU in order to avoid tougher border control. This has been a growing portion of the 15 billion illicit cigarettes found in Europe this year, contributing to EUR 2 billion in tax revenue losses.

Here are some other headlines from the second phase of the KPMG Stella report:

1. Illicit factory raids are on the rise in the EU
In the EU last year, 51 raids were carried out on factories where illicit production was taking place. The increase of 132 percent compared to 2017 is due to the rise in the number of criminal gangs setting up operations within the EU’s borders. Organized crime groups (OCGs) seem to be moving away from large volume transport to low volume transport in order to spread their risk of exposure across multiple smuggling routes. A continuation of the trend toward “ant smuggling” has also been noticed, with a notable rise in the number of on-person and car seizures across the EU.

2. Production machinery is easy for criminal groups to get
Organized crime groups are able to get increasingly sophisticated, industrial grade machinery online. These parts are then shipped via free-trade zones to avoid detection, typically from the Middle and Far East. This is making it quicker and easier for organized criminals to set up and maintain illicit tobacco factories. Raid and seizure data from 2018 indicates that EU manufacturing capacity could potentially account for up to 5.2 billion cigarettes. Since most of the materials and constituent parts of the machinery required for the illicit manufacture of cigarettes are legal, this poses challenges for law enforcement to restrict OCG’s access to these items.

3. Poland, Czech Republic, and Greece appear to be key illicit factory locations
Based on data from factory raids over the past year, we can see that Poland, Greece and the Czech Republic are the central illicit tobacco manufacturing locations in Europe. With the exception of those in Greece, illegal manufacturers transport their counterfeit and illicit white cigarettes across Europe. Greece’s counterfeit cigarettes are largely sold domestically, as the country has the highest level of counterfeit cigarette consumption in the EU, with an estimated 1.5 billion cigarettes last year.

The criminal groups that exist in these countries operate with differing levels of sophistication. Some raids in the past year identified large operations, reporting between 15 and 20 arrests. Others reported fewer than six. The supply chains used by these factories also involved other products like illegal drugs, counterfeit clothing, and prescription drugs.

4. Illicit trade is a growing problem in the EU, not just for tobacco, but for many products
Illicit trade is not isolated to cigarettes, and the KPMG Stella report shows that illicit trade is rising as a share of all EU imports. The report highlights data from the European Commission that reveals a 27 percent increase in the number of non-EU goods detained by the EU authorities because of suspicions of intellectual property infringement. This trend is being seen on a global scale as well, with the value of counterfeit and pirated goods expected to more than double between 2013 and 2022—from USD 1.1 trillion up to USD 2.8 trillion.

For the full KPMG Stella Report, click here.